Bass Sees BOJ Bond Purchases Overwhelmed as Investors Dump Debt
J. Kyle Bass, whose Hayman Advisors LP made $500 million amid the U.S. subprime crisis, said the Bank of Japan will have to “dramatically” increase bond-buying efforts that have been “overwhelmed” by investors selling.
Benchmark 10-year Japanese government bond yields rose to 1 percent yesterday for the first time since April 2012, more than triple the all-time low reached last month, a day after the BOJ announced unprecedented bond buying. Japanese shares also plunged the most in two years, trimming gains since November when Shinzo Abe called for expanded fiscal and monetary stimulus before elections that made him prime minister.
“Abe and the BOJ face what I call the ‘rational investor paradox,’” Dallas-based Bass, who has predicted a financial collapse in Japan since 2010, wrote in an e-mailed response to questions. “If JGB investors begin to believe that Abenomics will be successful, they will ‘rationally’ sell JGBs to buy foreign bonds or equities.”
BOJ Governor Haruhiko Kuroda said after a board meeting two days ago that excessive bond-market volatility must be avoided and he will adjust debt-buying operations as needed. His board affirmed a policy set on April 4 of expanding the monetary base to fuel 2 percent inflation in two years. JGBs rallied yesterday after the BOJ said it would supply 2 trillion yen ($19.7 billion) in one-year funds to financial markets.
The 10-year JGB yield closed down five basis points to 0.835 percent. The 17 1/2 basis-point gap between yesterday’s high and low rate was the widest since April 5. The BOJ’s injection was done in response to excessive volatility, according to an official who asked not to be named due to the central bank’s policy. The Topix Index of shares plunged 6.9 percent, the most since the March 2011 record earthquake and nuclear disaster.
Selling from JGB investors has “overwhelmed the BOJ’s ability to purchase them,” according to Bass. “The BOJ is going to have to dramatically expand its JGB purchasing operation if it is going to be successful in holding back rates.”
Bass said in an interview with Bloomberg Television last month that a rise in JGB yields following the BOJ’s April pledge was a sign of stress in the market. He said in January he’s buying bearish options that are “way out of the money” to bet against Japan.
Japanese banks, which had been using their excess deposits to buy government bonds, have reduced their holdings as the central bank increases purchases. Lenders had 164 trillion yen of the securities in February, down from a record 171 trillion yen in March last year.
“Everyone that holds JGBs will likely act rationally and sell a portion of their JGBs to buy foreign bonds or domestic equities,” Bass said. “If holders sell a mere 5 percent of their holdings (50 trillion yen), then the BOJ’s new plan isn’t large enough.”
Bass, a former salesman for Bear Stearns Cos. and Legg Mason Inc., started Hayman in 2006 to focus on corporate turnarounds, restructurings and mortgages.
Bass has been skeptical about many of the measures governments have taken to address problems in the wake of the financial crisis. In October 2010 he said Japan’s economy might unravel in the next two to three years, and that its interest payments would exceed revenue. “Japan can’t fund itself internally,” Bass said. In March 2009 he said the rise in government borrowing could produce a “potential inflationary time bomb” that would grow with fiscal stimulus.
Price volatility for Japanese government bonds surged 2.6 percentage points this year to 3.69 percent as of May 21 based on a 60-day reading, the biggest advance among 26 sovereign-debt markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.
Japan’s debt-servicing costs will rise 100 billion yen for each 10 basis-point increase in yields, Finance Minister Taro Aso said May 16. Yields on Japanese government bonds of all maturities climbed to 0.72 percent on May 22, from 0.4 percent on April 4, the lowest since 2003, according to Bank of America Merrill Lynch data.
The nation’s debt-carrying costs will probably reach a record 23.8 trillion yen to 23.9 trillion yen in the fiscal year starting April 2014, up more than 7 percent from this fiscal year, the Ministry of Finance projected in March. This year’s costs made up 24 percent of the budget. In the U.S., total interest payments of $359 billion accounted for about 10.2 percent of budgetary outlays in the year that ended September, according to Treasury data.
The outstanding debt of the world’s third-largest economy was 991.6 trillion yen at the end of March, a ministry report showed this month. It’s projected to reach 245 percent of gross domestic product this year, according to an International Monetary Fund estimate, the highest ratio in the world.
Japan’s economy expanded at an annualized 3.5 percent pace last quarter, the fastest rate in a year, a government report showed on May 16. Gross domestic product will probably grow 1.4 percent this year and 1.3 percent in 2014, according to median estimates in Bloomberg News surveys.
If the BOJ fails to spark economic growth or destabilizes the bond market, “real JGB yields will rise and increase future funding costs,” Tom Byrne and Matt Robinson, analysts at Moody’s Investors Service, wrote in a report last month. Considering the size of the nation’s debt, “there is little room for miscalculating the market.”
Kuroda said the BOJ will adjust its bond-buying program as needed. He said he’s not expecting yields to jump a lot and volatility in the bond market isn’t affecting Japan’s economy yet.
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